What Is a Pareto Analysis?

What is a Pareto analysis? 

A Pareto analysis, or the Pareto principle, is also known as the 80/20 rule because it is based on the idea that 80 percent of a project’s benefit can come from doing 20 percent of the work. Conversely, 80 percent of a situation’s problems can be traced to 20 percent of the causes.

The technique is named after Italian economist Vilfredo Pareto, who observed in 1895 that 80 percent of Italy’s wealth belonged to only 20 percent of the population.

Although the Pareto principle is used primarily in business contexts, it can have other applications. These are some business and marketing examples:

• Eighty percent of complaints come from 20 percent of customers.
• Eighty percent of profits come from 20 percent of the company’s effort.
• Eighty percent of sales come from 20 percent of products or services.
• Eighty percent of sales are made by 20 percent of sellers.
• Eighty percent of clients come from 20 percent of marketing activities.

Related: How to Deal With Difficult Customers

How to conduct a Pareto analysis

There are several ways to conduct a Pareto analysis, but they all revolve around the same guiding principles. These are the six steps for conducting a Pareto analysis:

1. Identify the problems. List all of the problems you need to solve.
2. Determine the root causes. Analyze each problem to identify the fundamental cause of each one.
3. Score the problems. The scoring method you use will depend on the type of problem. If the problem revolves around improving profits, then the scoring might center on how much each problem is costing your business. If you are trying to boost customer satisfaction, you might score the problems on the number of complaints that would be eliminated if the problem were solved.
4. Group the problems. Organize the problems by root cause.
5. Tally the scores. Add up the scores for each cause group. The one with the top score should be the highest priority, while the one with the lowest score should be the lowest priority.
6. Take action. Start tackling the causes of the problems. Deal with the top-priority problem or group of problems first.

The benefits of using a Pareto analysis

Here are some of the top advantages of using a Pareto analysis:

• It increases organizational efficiency. A Pareto analysis allows you to shift your company’s focus, prioritize your problems and identify the root causes of those problems. Companies are more efficient when they focus efforts in the places where they will see the greatest return on investment (ROI).
• It enhances problem-solving skills. A Pareto analysis lets you organize work-related problems into a clear set of causes and effects, which you can then address individually.
• It improves decision-making. Employees and businesses can use a Pareto analysis to decide which practices are most effective and determine how to improve current operations. Learn how benchmarking can benefit operations.
• It improves time and change management. You can use the Pareto analysis to look deeper into the effectiveness of any changes you make or need to make to improve your business practices. This helps you manage these changes and any time that you spend implementing them.
• It helps with planning, analysis and troubleshooting. You can use the Pareto analysis for planning and troubleshooting any changes you will make to your business practices.
• It shows the cumulative impact of issues on business. Because a Pareto analysis is versatile and applicable to multiple areas of business, it provides a look at the overall impact of challenges across the entire organization. This helps you and your company’s other decision-makers identify which problems to resolve first.

How businesses use a Pareto analysis

A Pareto analysis helps managers focus on what is most important and urgent for their business. Here are some examples of how businesses use this tool:

• Twenty percent of marketing efforts represent 80 percent of the results. While marketing and communications efforts are hard to measure, this is a critical principle for anyone who wants to achieve the maximum results with less marketing effort. By identifying which 20 percent is the most valuable, you can double down on those efforts and reduce resource expenditure on the other 80 percent of marketing operations.
• Twenty percent of posts generate 80 percent of traffic. If you work with social media and content marketing, you can use the Pareto principle to analyze which posts were most effective, discover their similarities and use them in future content. This can also help you optimize your other posts.
• Eighty percent of the quality failures originate from 20 percent of the tasks. If you work in process management, you can use a Pareto analysis to establish essential tasks and determine which tasks fall into the 80 percent of quality failures. Then, you can model the process to make those tasks more efficient.

Pareto analysis example

There are many ways for businesses to use a Pareto analysis to their advantage. For example, if a company wants to improve service at a customer call center, the first thing they need to do is survey customers to find out why they were unhappy with the call center’s service.

After getting customer responses back, the call center could divide the information by complaint category, which may include “too long on hold,” “no evening or weekend staff,” “not knowledgeable,” “not courteous,” “transferred too many times,” “could not locate file,” “no phone payment options,” “hard to understand representative” and “charged more than promised.”

From there, they would total the number of complaints in each category and determine the percentage of each complaint compared with the total amount. Then, they would find the cumulative percentage of the categories by adding them together. Based on this data, they could determine which issues account for 80 percent of the problems. In our call center example, the primary culprits might be “too long on hold,” “no evening or weekend staff” and “not knowledgeable,” as they account for approximately 80 percent of the total complaints. [Related: The Best Call Center Services]

In light of the analysis, it is easy to determine that the call center needs to concentrate its efforts on those three complaints to improve its overall customer service.

Strengthen your business with a Pareto analysis

Many businesses know they need to improve, but they are too close to the work to see exactly where and why. With a Pareto analysis, you can quantify your problem areas so you know exactly where to target your time and resources. If you want to be sure you’re making the right choices for your business, a Pareto analysis can show you the way. 

Natalie Hamingson and Chad Brooks contributed to this article.